SanDisk 2012 Annual Report Download - page 137

This is a TAB type table. Insert
conts here. Annual Report
The net share settlement feature of the 1% Convertible Senior Notes due 2013 and 1.5% Convertible Senior
Notes due 2017 may have adverse consequences for us or our noteholders. The 1% Convertible Senior Notes due
2013, or 1% Notes due 2013, and 1.5% Convertible Senior Notes due 2017, or 1.5% Notes due 2017, are subject
to net share settlement, which means that we will satisfy our conversion obligation to holders by paying cash in
settlement of the lesser of the principal amount and the conversion value of the 1% Notes due 2013 and 1.5%
Notes due 2017 and by delivering shares of our common stock in settlement of any and all conversion obligations
in excess of the principal amount. Accordingly, upon conversion of a note, holders might not receive any shares
of our common stock.
Our failure to convert the 1% Notes due 2013 and 1.5% Notes due 2017 into cash or a combination of cash
and common stock upon exercise of a holder’s conversion right in accordance with the provisions of the
applicable indenture would constitute a default under that indenture. We may not have the financial resources or
be able to arrange for financing to pay such principal amount in connection with the surrender for conversion of
the 1% Notes due 2013, which are due in May 2013, and the 1.5% Notes due 2017. While we do not currently
have any debt or other agreements that would restrict our ability to pay the principal amount of any convertible
notes in cash, we may enter into such an agreement in the future, which may limit or prohibit our ability to make
any such payment. In addition, a default under either indenture could lead to a default under existing and future
agreements governing our indebtedness. If, due to a default, the repayment of related indebtedness were to be
accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such
indebtedness and amounts owing in respect of the conversion of any convertible notes.
The convertible note hedge transactions and warrant transactions and/or early termination of the
convertible note hedge and warrant transactions may affect the value of the notes and our common stock. In
connection with the pricing of the 1% Notes due 2013 and 1.5% Notes due 2017, we have entered into privately
negotiated convertible note hedge transactions with the underwriters in the offerings of the notes (collectively,
the “dealers”) or their affiliates. The convertible note hedge transactions cover, subject to customary anti-dilution
adjustments, the number of shares of our common stock that initially underlie the 1% Notes due 2013 and the
1.5% Notes due 2017. These transactions are expected to reduce the potential dilution with respect to our
common stock upon conversion of the 1% Notes due 2013 and 1.5% Notes due 2017. However, if there is a
counterparty default or other nonperformance under the hedge transactions, we may not be able to reduce the
potential dilution with respect to our common stock upon conversion of our 1% Notes due 2013 and 1.5% Notes
due 2017, or we may not be refunded our initial costs associated with such hedge transactions. Separately, we
have also entered into privately negotiated warrant transactions with the dealers or their affiliates, relating to the
same number of shares of our common stock, subject to customary anti-dilution adjustments.
The 1% Notes due 2013 and the 1.5% Notes due 2017 have a conversion feature with a strike price of
$82.36 and $52.37, respectively. If our weighted average stock price goes above the strike price of either the 1%
Notes due 2013 and/or the 1.5% Notes due 2017 during any of our reporting periods, we will be required to
include additional shares in our diluted earnings per share calculation, which will result in a decrease in our
reported earnings per share. While we have entered into convertible note hedge transactions which will
effectively increase the strike price from an economic standpoint and reduce the potential dilution upon
conversion, the impact of the convertible note hedge transactions will not be reflected in our reported diluted
earnings per share.
In addition, we may, from time-to-time, repurchase a portion of the 1% Notes due 2013 or the 1.5% Notes
due 2017. In connection with any such repurchases, we may early terminate a portion of the convertible note
hedge transactions we entered into with respect to the 1% Notes due 2013 or the 1.5% Notes due 2017 that we
repurchase, and a portion of the warrant transactions we entered into at the time of the offerings of those notes. In
connection with any such termination of a portion of the hedge and warrant transactions, the counterparties to
those transactions are expected to unwind various over-the-counter derivatives and/or sell our common stock in
open market and/or privately negotiated transactions, which could harm the market price of our common stock
and the notes.
31